Internet Portals: Chinadotcom Benefits from China Trade Agreement
New York, NY, September 25 /SHfn/ -- This week, as China's male gymnastics team won their first Olympic gold, chinadotcom [CHINA] triumphed, too. After the U.S. Senate voted to normalize trade relations with China, the company's share price immediately rose 15% from an opening of $16-7/8 to $18-7/16, finally settling at around $15 for the rest of the week. This company, named after the nation with the largest potential Internet market in the world, deserves continued attention from investors.
As mentioned in a previous StockHouse report, Hong Kong-based chinadotcom is the largest and most aggressive Internet player in Asia. Its businesses consist of Internet consulting, an online advertising network, portals and strategic investments in a host of other Internet-related ventures. Its investors include America Online [AOL], New World Infrastructure, and Xinhua, China's official news agency. Chinadotcom was the first Chinese Internet portal listed on NASDAQ. It launched at $20 and recorded a high of $78 in March, then settled to its current price of $16, down nearly 80% from its yearly high.
Chinadotcom CEO Peter Yip--who sat up all night on the opposite part of the world, anticipating the result of the Senate vote in favor of permanent normalization (PNTR)-- was overjoyed. He spoke with CBS MarketWatch shortly after that, exclaiming excitedly that "once and for all, we are committed to each other--to normal trading relations that benefit both countries." This vote has now paved the way for China to join the World Trade Organization (WTO), assuring that China will cut tariffs and open its markets. It has also given hope that the government will allow foreigners to participate in its Internet and telecommunications development, and benefit from its market potential.
Chinadotcom has been preparing to take advantage of China's entry into the WTO for the past six years by firmly establishing itself in this potentially lucrative Internet market. Yip believes that "chinadotcom will be a major beneficiary of PNTR," owing much to chinadotcom's "close relationship with the Chinese government." Xinhua, which Yip calls the "valued strategic shareholder," provides chinadotcom with beneficial access to the Chinese political and economic system. In an interview with RadioWallStreet.com shortly after the Senate vote, Yip said that chinadotcom has spent several years working together with the Chinese government to build Internet content and promote the Internet throughout China.
Wall Street analysts take a positive view of chinadotcom's joint ventures with Chinese government agencies. These include a planned venture with a subsidiary of the Ministry of Information Industry, the governmental department in charge of China's electronic communication systems. The ministry is losing its monopoly, but still holds considerable power in the telecommunications sector. The number of Chinese Web users, doubling every six months for the past two years, now stands at 17 million and is still rising. The number of mobile phone subscribers is presently 50 million, and is expected to triple within three years. With the Chinese government's permission to gradually remove Internet barriers, the joint venture assures that chinadotcom will be among the first beneficiaries. Another joint venture is the newly announced majority investment in a company with the exclusive franchise to deliver the online travel products of the state-owned China Travel Services. This also looks rosy, as more and more foreigners--especially those in business--will be traveling to China as the country opens its door after the passage of PNTR.
As CBS and many other U.S. media outlets have reported, opening up China to trade has been a dream of American business for over 150 years. Many U.S. companies will benefit from the top priority granted by PNTR. So far, imports from China have been $36.1 billion higher than U.S. exports to China. But this will change, as the new trade agreement gradually lifts trade barriers, which now include high tariffs and mandatory joint venture schemes that keep U.S. products, services and capital out of China. For example, China will reduce its tariff and non-tariff barriers to imports of foreign-made goods and services by an average of more than half, from 45% to 21.7%. The U.S. Trade Representative estimates the resulting increase in world exports of goods and service to China at $21.3 billion. The immediate increase in U.S. exports is estimated at $3.1 billion.
Hong Kong will act as a major gangplank for foreigners to enter mainland China, and Hong Kong-based chinadotcom is ideally positioned to help U.S. companies expand there. Chinadotcom has joined with Siemens Shanghai Mobile Communication and Motorola [MOT] to enable their mobile phone users to access chinadotcom's portal network. Chinadotcom is also helping America Online build a Chinese Web site.
Two weeks before the Senate vote, Credit Suisse First Boston initiated coverage with a "buy" rating for chinadotcom, and a target price of $25.50. CSFB also estimated that chinadotcom will be profitable by the end of the fourth quarter of 2001. In an exclusive StockHouse interview recently, Yip indicated that he was "very comfortable" with this estimate. In the quarter ending June 30, chinadotcom reported 52% revenue growth to $30.3 million, with a cash loss of $10.6 million. These numbers easily beat Lehman Brothers Asia's estimate of $25 million in revenue and a loss of $16.5 million.
Last month, the company cut 48 jobs in China, and announced that it expected to scale down its marketing costs, which totaled around $9 million in the second quarter. This initially raised some investor concern over the company's financial situation. As a Hong Kong-based company, chinadotcom is a foreign-funded company in China. However, after China's entry into the WTO, chinadotcom will have huge market potential, since the Chinese government has promised that foreigners may own up to 50% of each Chinese Web company. So far, chinadotcom, with $500 million cash in hand, has invested in over 40 Internet companies around the world, and Yip confirmed that the company plans to carry on this aggressive strategy. Yip also pointed out that "market consolidation is making investments cheaper with valuations going down."
Now with China's open market, chinadotcom will be in a position to better realize the potential of its unique "three dimensional" business model. The company's three business units include building, distributing and selling. Its "build" component provides integrated e-solutions to its clients. The "sell" arm, 24/7 Media Asia, provides online marketing through chinadotcom's global network. These two units accounted for 52% and 44%, respectively, of the company's total revenue last quarter. The remaining 4% came from its very popular network of portals, where content, community and commerce make up the "distribute" component of chinadotcom's business. After China's WTO membership, some experts optimistically estimate that the total online ad market in China will be around $400 million a year by 2004--and chinadotcom will surely benefit from it.
The good news from the Senate vote spiked chinadotcom's stock price, a little like a performance-enhancing drug might boost an Olympian's ability. Long-term performance, on the other hand, may require patience. China's market won't change overnight after the trade bill, and it's unlikely that chinadotcom's share price will either. But investors who act early may be awarded a gold medal later on.
stockhouse.com
*************
very bullish article indeed.
Jack |
